Technology plays a key role in most enterprises, however it doesn’t always make sense to tie up valuable working capital on equipment that can be superseded rapidly.
Leasing can provide advantages
Rather than purchasing technology-based equipment like phone systems, computers and peripherals, there can be advantages to leasing them. There are two main types of lease available to business operators: finance leases, and operating leases.
Broadly speaking, a ‘finance’ lease lasts for a defined period, with a residual payment due at the end of the lease term. As the lessee, you may be able to purchase the asset outright by paying this residual, or simply transfer the lease to a new piece of equipment.
By contrast, an ‘operating’ lease involves renting your equipment for a set period, generally without any intention of owning it. As a plus, you may be able to upgrade the equipment before the lease expires. Unless the technology you are purchasing is of significant value, it is likely you will be offered an operating lease.
One of the key advantages of leasing rather than owning business equipment is that it lets you meet the cost of an item over an extended period using regular lease payments rather than making one large payment upfront. This allows for better cash flow management, letting you conserve working capital for other aspects of the business including possible expansion.
From a tax perspective, there are significant differences between leasing and purchasing equipment. Lease payments are generally fully tax deductible, and so can be used to reduce the venture’s tax bill. When equipment is owned rather than leased, your tax deduction is limited to an annual depreciation claim at rates set by the Australian Taxation Office.
One further plus of leasing over buying is that responsibility for maintenance of the item often rests with the owner (or lessor), not you (the lessee). This can save you a lot if your equipment malfunctions.
On the downside, it is likely to be a condition of any lease that you take out insurance for the item, though it is wise to have all your business equipment insured irrespective of whether it is leased or owned.
As there are pros and cons associated with both purchasing and leasing business equipment, it is worth speaking with your accountant to determine which option is best for your particular business. If you do choose to lease, give careful consideration to the lease term. It is usually far cheaper to extend the term rather than arrange an early termination of the lease.
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